Hereby I will prove how the realty boomers arguments are false.

What are the boomers arguments?

1.) Buy today, houses always increase in value in the long run.
WRONG. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
Even Warren Buffett have pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. If a house is 100 years old, it's value in sheltering you is exactly the same as it was 100 years ago. Then came the maintenance as the house didn't renovate itself. It also has taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
To put this is simple perspective, vegetable were costing Rs.5-6/kg when 5 digit salary was a rarity.
Today, the prices have gone up by about 4 times but so have the salaries. So, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that salaries rose a proportional amount.

2.) Renting is just wastage of money.
WRONG. As said before renting is now much cheaper per month than owning. If you don't rent, you either:

* Have a mortgage, in which case you are throwing away money on interest, tax, insurance, maintenance, costs that increase forever.
* Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income is sufficient for emergency expenses,retirement etc.

Either way, owners lose much more money every month than renters and that's assuming prices don't correct to very high level & everything is smooth in the economy.

3.) As a renter, you won't have any money left as you will spend them on vacations,cars & hence won't have equity/savings etc.
WRONG. Equity is just money. Renters are actually in a better position to build equity/savings through investing in anything but housing. Renters can get rich much faster than owners, just by investing in conservative stocks & bonds.

* Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
* Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity/savings. Only houses are such a guaranteed drain on cash.
* Owners must insure a house, but not most other investments.
* Owners must pay to repair a house, but not a stock or a bond.
* Owners lose their money as house prices reduce. The EMI's remain constant in spite of reduction in rates. At the end of loan tenure, they would have paid almost twice than that of current renters who will buy at logical rates. Keep interest rates in mind. Most of the EMI is not principal amount but interest.

4.) There are great tax advantages to owning a house.
WRONG. Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. And even then, the tax advantage is not significant compared to the large monthly loss from owning.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc.

5.) RE is based on local factors, it's not a national phenomenon. RE of Delhi-NCR,Bangalore & rest of the cities has nothing to do with Pune RE.
WRONG. Lending rates remain the same throughout the country. ALL loans are harder to get. This will drive prices down everywhere.

6.) A rental house provides good income. So, you can rent if you have purchased as investment.
WRONG. Rental houses provide very poor income in hyped areas and certainly cannot cover mortgage payments. Remember there is almost 300% difference between EMIs & rent for the same house.

It's pointless to do the work of being a landlord if you can make more money with no risk, no work, and no state income tax by investing in assured good returns bond.

7.) If owning is a loss in monthly cash flow, but appreciation will make up for it.
WRONG. Appreciation is negative. Prices are going down. It only adds to the injury of already high EMI's.

8.) As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
WRONG. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing now that many house owners are near bankrupt as they don't save anything at the end of the month due to high EMI's.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.

9.) House prices never fall atleast in Pune.
WRONG. If you see the RE scenario of 1996, prices crashed by 50% & took a whole 7+ years to recover.
Exact 1996 scenario may not be there today but strong correction is inevitable across the city.

10.) House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
WRONG. House prices won't be zero, but the equity or the principal amount you paid can be zero or even negative. What you will pay as EMIs later in actual terms is not for the principal amount but only the interest as house prices dip. So, you will be only serving the bank.

11.) Prices will soften gradually, won't crash immediately.
WRONG. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for long time. These are just more manipulation of buyer emotions, to get them to buy even while prices are falling.

12.) The bubble prices were driven by supply and demand alone.
WRONG. Prices were driven by low interest rates and risky loans & good returns for investors in initial phases of boom in 2004-05.
Prices went up, interest rates went up & buyers savings went down. So prices are violating the most basic assumptions about supply and demand.

13.) There is lack of land.
WRONG. Ample of land is available & continue to be even in future in Pune. Sales volume are down. Even in Japan (small country with less land), prices went down. Current prices here are the same as that of 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.

14.) If you don't own, you'll live in a cheap neighborhood later.
WRONG. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.

15.) There's always someone predicting a real estate crash.
TRUE, yet irrelevant. There are very real crashes every decade or so. Even a broken clock is right twice a day.

16.) Local incomes justify the high prices.
WRONG. The mortgage should be more than your 3 years earning. It is much higher today. Most are already in danger/red zone.

17.) You have to live somewhere.
CORRECT. But that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the down slide in RE.

18.) It's not a house, it's a home.
WRONG. Wherever one lives in it is home, be it apartment, condo, bungalow , mansion or house. Calling a house a "home" is a manipulation of your emotions for profit.

19.) If you don't buy now, you'll never get another chance.
WRONG. History proves otherwise.
Here's a beautiful quote from a analyst:-
"The real issue isn't whether you will be stuck being a renter all your life, she says. Its whether you'll get so scared about being shut out that you'll buy at the market's peak and be stuck in a property you can't afford or sell."

20.) It would take major economic recession or a major earthquake that wipes out this area in order for the price to fall by over 50%.
WRONG. Even today, if the prices fall by 50%, there will still be very few people who can buy at this levels due to uncertainty in jobs & most importantly high EMIs. Also, look at the rental rates for equivalent houses. Which loss per month is larger? EMI or rent?

contd....
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  • Strictly speaking... Whatever be your personal views regarding the builders and the government... Even I do not support some of governments decisions... But that is my personal opinion and it can be wrong...

    The bitter truth is that the RE market will not face any downfall and there are strong clues to support it... Hence, any RE bubble is not going to burst in pune... And any such rumor is going to affect a common man badly.. especially if buy decisions are postponed expecting some downfall..

    In-fact prices will rise in majority of developing and attractive micro-markets of pune (example handewadi road, vishrantwadi etc. etc.) where RE price's are still under common man's reach..

    Momentum being strong and once resistance levels are broken, RE prices will show an increase..

    I know bears will not be able to digest this bitter truth....
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  • Interest rates cooling down wont revive demand b'cos end user simply cannot afford these prices and he is the one who takes the loan , not investors .
    By the way, why is realty sector getting a stimulus package - Have the banks choked so much on NPAs that this is a warning bell ?
    Also what will be the impact of FDI in multibrand retail on commercial RE ?

    Check the percentage of end-users in todays market :

    http://karvediat..in/2012/06/who-is-buying-property-in-pune-end.html
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  • Originally Posted by lovepune

    The bitter truth is that the RE market will not face any downfall and there are strong clues to support it... Hence, any RE bubble is not going to burst in pune... And any such rumor is going to affect a common man badly.. especially if buy decisions are postponed expecting some downfall..

    I know bears will not be able to digest this bitter truth....


    OK, lets say, that prices stay same or increase, and Govt comes with a stimulus packages, how is that going to make it affordable to the end buyer. He/She will still feel it is beyond his reach . Then what happens? Another stimulus package.

    Instead of fixing the problem at root, they are trying to circumvent it. If they do an audit for these builders, who are crying that their material cost/labour costs are more, one will find that they are atleast making 50-60% profit.

    The cost of construction is about Rs 1100-1300 /sqft materials + 400 /sqft labour + 500 psft land (they bought it long back, so it was cheaper then) = Rs 2200 psft. What rates are they selling for ? Rs 4500 or Rs 5000 or Rs 5500. So you can calc their profit margins. Yet, they say, they don't make profits....They should quit the business and do something else. Why are they still there ? Does it ring the bell.

    Yes, this is hard to digest for the bulls..
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  • Wishing for a price drop in RE is like asking SUN to rise in the night. Prices are never going to drop. The only thing that will happen is that big corporate houses will look towards Tier2 cities where houses are still very much affordable. Examples are TCS/Infosys opening their campuses in Indore.

    Some day or other corporates will have to take similar decisions. Otherwise after 5 years or so no fresher with salary of 22k will come to join any company in Metros. The time when these giants started their offices in remote areas of metros, they got it for very cheap prices. But in last decade things have changed a lot. Everybody is feeling the heat.

    As previously quoted virtual appreciation is very much there in the market. Real profit is not there. Because common people dont have any money. They may travel few more kms but cant pay unreasonable price in the city.

    So next 8-10 years i see many Tier2 cities growing but RE prices will continue to Roar with no buyers.
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  • Originally Posted by kk83710
    Wishing for a price drop in RE is like asking SUN to rise in the night. Prices are never going to drop. The only thing that will happen is that big corporate houses will look towards Tier2 cities where houses are still very much affordable. Examples are TCS/Infosys opening their campuses in Indore.

    Some day or other corporates will have to take similar decisions. Otherwise after 5 years or so no fresher with salary of 22k will come to join any company in Metros. The time when these giants started their offices in remote areas of metros, they got it for very cheap prices. But in last decade things have changed a lot. Everybody is feeling the heat.

    As previously quoted virtual appreciation is very much there in the market. Real profit is not there. Because common people dont have any money. They may travel few more kms but cant pay unreasonable price in the city.

    So next 8-10 years i see many Tier2 cities growing but RE prices will continue to Roar with no buyers.


    in year 2009, prices did come down and many of the buyers got advantage of it...

    btw if big companies are trying to move to tier2 cities for cost reasons, what happens to the people working in these companies in bit cities? in fact, for some reason if 3 top companies in Pune Hinjewadi decide to move to Nashik, the entire Varje/Pimpri and nearby area residential market will crash.

    It is true that bears cry for dooms day all the time and it doesnt come very often.. but when it comes and if you are prepared, you can make the purchase of a lifetime... and since for many, home purchase is once a lifetime spending, waiting is better so as to get a true value for money you are spending.. just affordability should not be the main factor.
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  • Originally Posted by kk83710
    Wishing for a price drop in RE is like asking SUN to rise in the night. Prices are never going to drop. The only thing that will happen is that big corporate houses will look towards Tier2 cities where houses are still very much affordable. Examples are TCS/Infosys opening their campuses in Indore.

    Some day or other corporates will have to take similar decisions. Otherwise after 5 years or so no fresher with salary of 22k will come to join any company in Metros. The time when these giants started their offices in remote areas of metros, they got it for very cheap prices. But in last decade things have changed a lot. Everybody is feeling the heat.

    As previously quoted virtual appreciation is very much there in the market. Real profit is not there. Because common people dont have any money. They may travel few more kms but cant pay unreasonable price in the city.

    So next 8-10 years i see many Tier2 cities growing but RE prices will continue to Roar with no buyers.


    One thing bulls will agree, is that the rates will not increase 30%-50% in a year. Which was the case sometime ago. Today many resale properties are over-priced not due to the value but due to the overhead of loans/EMIs.

    So, these new properties with no buyers, will be vacant forever or be available for rent ? Right. So, why should I hurry to buy ? Also since supply is more, the rental rates will also be constrained and will not run away.

    Our Tier2 cities are still not mature to hold these companies, also seeing the current conditions in Tier-1 cities, I hope the people in these Tier2 cities will learn their lesson and exercise caution. The very fact that Tier1 companies and people are moving to Tier2 cities, says a lot.

    All our Town-Planners are either illiterate or get job thru reference of some politician/builder or folks who come from Villages who cannot design/plan a proper city. They are still planning places, worse than the Mohanjodaro people, who built their city with proper planning in those perhistoric times. Its a shame....
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  • Originally Posted by mymarji

    The cost of construction is about Rs 1100-1300 /sqft materials + 400 /sqft labour + 500 psft land (they bought it long back, so it was cheaper then) = Rs 2200 psft. What rates are they selling for ? Rs 4500 or Rs 5000 or Rs 5500. So you can calc their profit margins. Yet, they say, they don't make profits....They should quit the business and do something else. Why are they still there ? Does it ring the bell.

    Yes, this is hard to digest for the bulls..


    Rs 500 psft land is it?? U talking about Pune right? do let me know where in Pune you get land at Rs 500 per sft...even it was available at this rate 5 years ago let me know where.
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  • Union Minister of Housing and Urban Poverty alleviation (HUPA) Kumari Shailaja has said in an interview yesterday that over 1.2 Crore flats are lying vacant in the country. This was said in the backdrop of meeting where apart from finalisation for national RE regulator (like TRAI), there will be regulator even for construction sector, where safety of labors, working hours, min wage etc. will be addressed.

    Apart from this, on NDTV it was mentioned that over 50% flats in Pune are being held by investors. Also, a member has manojsti has mentioned above max flats are unsold in Maharashtra. Now add investor + builder + underconstruction flats number & then see the real sales.

    As mentioned before, the real sales based on registration office numbers have already fallen by 80% this quarter.

    As far as FM Chiddu is concerned, he has already mentioned it that unless builders cut rate, RE won't be given any packages, especially when NPAs are increasing at max rate in RE sector.

    lovepune,

    We have option to rent, no one is homeless. Hence, buyers will now buy only at comfortable levels. That fear factor no longer exists. Just tell some buyer that rates will increase from Monday & then see his reply :D.
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  • Originally Posted by rembrants
    Rs 500 psft land is it?? U talking about Pune right? do let me know where in Pune you get land at Rs 500 per sft...even it was available at this rate 5 years ago let me know where.

    Find out the land rates at which they were purchased by Nanded City & Amanora Park Town & Blue Ridge. You will shocked to know that these were fraction of 500.
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  • Please mention the year of purchase, add to it the developemnt costs that they had to incur to convert it from a jungle to habitable land, add the interest rate on that, and yes...do not forget the 'soft costs' that builders incur to get the project through

    Look, I am not advocating the builders are fair...they are probably the shrewdest of all...and it is a dirty industry.

    But I know for sure that land is not cheap. it is limited in supply and its cost will go on increasing forever.

    While the builders do earn a handsome returns, it is not easy to complete such huge projects...why are they in neck deep in debt then?
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  • Originally Posted by mymarji
    One thing bulls will agree, is that the rates will not increase 30%-50% in a year. Which was the case sometime ago. Today many resale properties are over-priced not due to the value but due to the overhead of loans/EMIs.

    Appreciation is everywhere but stagnation is only in metros. I dont say that appreciation is not there in metros but not guaranteed. Tier2 cities I believe still are priced as per their values.

    Our Tier2 cities are still not mature to hold these companies, also seeing the current conditions in Tier-1 cities, I hope the people in these Tier2 cities will learn their lesson and exercise caution. The very fact that Tier1 companies and people are moving to Tier2 cities, says a lot.

    Any city will get mature or start maturing when big corporate houses start to move there. Was banglore mature before IT revolution or Noida/Gurgaon?
    Maturity can be related to experience which doesnt come without work being offered.


    All our Town-Planners are either illiterate or get job thru reference of some politician/builder or folks who come from Villages who cannot design/plan a proper city. They are still planning places, worse than the Mohanjodaro people, who built their city with proper planning in those perhistoric times. Its a shame....

    Things do change. No city is perfectly planned. Only certain areas get developed. Money is the main driving factor. When money starts flowing cities will develop eventually.
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  • Originally Posted by kk83710

    Any city will get mature or start maturing when big corporate houses start to move there. Was banglore mature before IT revolution or Noida/Gurgaon?


    If you ask me, Pune and Bangalore were really matured cities before IT came. IT seemed to bring revolution initially but eventually it has ruined these cities.

    Just 10 year back I could breath fresh air on Tilak road on any evening and parents felt comfortable letting their kids walk to school which was 1 km far... A developed city does not only mean just infra tenders. It means better living standard.
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  • rembrants,

    I will give you latest eg. of major RE city :- Mumbai. The land in Worli couple of months back was sold by DLF at INR 5,000/sq ft . The construction rate there is INR 1050/sq ft. And the selling rates is in several times the cost.
    Now you talk about costs like under-the-table etc. ; then you should also need to consider that builders are charging 100% terrace even when it is outside FSI, loading anywhere between 25-40% & it is this saleable area on which he is collecting money.
    Problem is you consider land (Carpet) & then see cost/sq ft on salable, which is wrong as it is atleast 35-40% more in reality.

    As far as builder being debts are concerned, the simple reason is GREED.
    The profit received from project 1 was put to land, then more land & then even more land. And now as these lands are not giving any output, builders are in debt.

    And why just builders, several buyers too have defaulted & their flats seized by banks (in past 1 year, the %age has shot up drastically), now do you say that the guy was getting good salary, still he defaulted, why ?? Over-leverage.

    Man, if Mallya can go bust, why not the builders who are not more greedy but poor financial planners as well.

    PRB,

    I agree with you man. When I was in college, it was fantastic, just few years back. Today, if I at all need to travel by bike, it is horrible to breath. The signal which I used to cross in 1 min, now requires me to wait for atleast 2 turns.

    For Bangalore, it was great right from beginning. It was capital of KA & because of IT, it too has lost old time charm. Sometimes, I feel IT is more of curse rather than boon for a city. It is only manufacturing that is boon to the area in real terms as infra is created because of it.
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  • Hiring slowdown takes a toll

    Man, finally the bad economic cycle is coming closer. Read the news below :-

    Owing to economic slowdown, the number of new jobs would fall by a whopping 3 million this fiscal, according to economist Bibek Debroy. Hiring slowdown depletes purchasing power of consumers and savages consumer confidence, say experts. And fast moving consumer goods (FMCG) companies are not pleased one bit – after all, they feel the pinch most.

    With GDP growth estimates coming down sharply of late, there is a huge risk to new jobs. Hiring freeze, job losses and absolute, not real, growth in salaries (that does not match inflation and hence lowers the purchasing power) have all set alarm bells ringing at FMCG companies.

    A survey by recruitment firm Manpower revealed that India’s employment scenario is the weakest in the last three years. And industry body Ficci states that the waiting period to find a job has increased from 2-3 months to 9-10 months. Many job-seekers are settling for junior roles.

    Despite attempts to shift focus to rural markets, FMCG companies can’t wish away the fact that urban markets account for much of their sales. And when hiring slows, sales, too, slow. Worse, signs are not encouraging.

    “Indian consumers have become progressively more pessimistic about future prospects over the last two years, following negative real wage inflation and a plunge in hiring. We see risks to overall consumption from: a) further job losses; b) delayed hiring in IT and financial services; and c) prolonged job search period post redundancies,” says Nitin Mathur and Jitin Samtani of Espirito Santo Securities. The brokerage house has turned bearish on the sector overall, leaving no buys in the FMCG space.

    Mathur and Samtani of Espirito fear the imminent slowdown in the consumer sector may even result in the “king of the defensive sector” losing its crown.

    Complete story here :-

    Hiring slowdown takes a toll on FMCGs - Money - DNA

    Btw, did you watch PMs address to the nation ?? The PM addressed the nation after 2.5 years & said, "Money Doesn't Grow On Trees". :D

    Robotic speech from robotic PM. Didn't knew was he serious was telling some joke. :D
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